Cree, Inc. (NASDAQ:CREE) has seen its stock price soar over the last year with amazing growth in an economy when most stocks have stalled. Their quarterly earnings reports have generally beaten expectations time and time again in the last year. Having said that, valuations on Cree, Inc. are now just getting too lofty. Could Cree by the Icarus of the investing world?
The myth of Icarus comes from Greek mythology. Icarus flew too near the sun despite warnings from his father. His wings melted and he fell to Earth. Could this be Cree? In January 2009, Cree stood at $15.59. Here we stand, going into March 2010 and Cree, Inc. is at $67.83. Granted, there is some growth to back it up but is it enough to justify this jump of over 335%?
Let's take a look at the fundamentals. Cree, Inc. is trading at an ending June 2010 fiscal year P/E of 43. Looking ahead to 2011, should it meet the expectations laid out by analysts on Yahoo! Finance, it would still be trading at a P/E of 34. If you scan across much of the semiconductor arena, there are not many stocks that come close to the P/E of Cree.
Bottom line is this, I believe Cree, Inc. is trading at these lofty levels due to short covering and the constant buying that it creates. Fundamentally and technically it has little reason to be this pricey. According to Yahoo! Finance, Cree has over 6 million shorts. I do believe it is due for a decent correction of 10% or more.
Disclosure: Chief Market Strategist Gareth Soloway is not Long or Short Cree, Inc. stock.
Chief Market Strategist
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